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US Economy Heading for intensive care
AN ECONOMIC storm is brewing over the USA that threatens to sweep across the Atlantic bringing mayhem and destruction in its wake. But Alan Greenspan, chairman of the US Federal Reserve (US central bank) is predicting a sunny future so long as investors are not distracted by a few showers.
Greenspan would be more convincing had he not been forced into recent interest rate cuts that were widely and correctly seen as panic measures in the face of mounting evidence of a crisis.
Meanwhile political and economic leaders in Britain declare that the storm will blow itself out before it reaches our shores. Their optimism is as misplaced as Greenspan's, for not only does Britain catch a cold when the US sneezes, but if the condition of the US economy should deteriorate further Britain could require a spell of intensive care.
Trade between Britain and the US accounts for many of British business's most profitable export markets. Also many thousands of British jobs depend on US investment like Ford and Vauxhall.
Recently, a warning not to take Greenspan's optimism at face value was issued in an editorial by the Financial Times. It is still fashionable to dismiss Marx as a hopelessly outdated product of the 19th century, but the FT refreshingly prefers the economic analysis of Marxism to the more 'modern' approach of the Federal Reserve.
In particular the FT warns of four fundamental problems facing the US economy.
First, the share of national wealth taken by company profits cannot rise indefinitely.
In Britain the share of economic output taken by wages has fallen by 5% since 1979. Big business's share of wealth shows a corresponding rise.
But this transfer of wealth slowed down significantly after 1990 suggesting business is finding it harder to further reduce the worker's share of output.
Falling unemployment and the fear of resurgent trade union militancy are presenting problems that capitalism hoped it had eradicated. Marx explained that the capitalist system of production constitutes a struggle between bosses and workers for the surplus (sales income after costs) produced by firms.
The decrease in the share taken by wages is costing an average British worker £1,000 per year. Industrial and social conflict is unavoidable unless this process is reversed.
Boardroom and stock market sentiment now believes that profits are at a peak and cannot rise forever. This is the start of a downward spiral for investment, sales and asset values.
Secondly, the private sector cannot go on spending more than it earns.
Massive private-sector debt has been taken on by businesses. A huge proportion of this has gone into the technology sector in pursuit of utterly unrealistic profit rates.
Much of what remains has poured into the stock market inflating shares way above any rational valuation and depriving real value-creating industries of investment. US consumer credit has played a crucial role in extending the last period of economic growth, especially in the US but also in Britain. Workers who received a reduced share of national wealth in their wage packets have used credit to buy goods beyond their means.
Marx explained also that the payment of wages at a level insufficient to buy up all the goods produced, creates the basis for cyclical economic crisis. Already, at the first indication of leaner times, new consumer credit has fallen dramatically.
Thirdly, foreign investors will not be willing to go on funding the deficit forever.
In order to go on expanding credit in the US, investment has been sought and obtained from around the world, the high dollar and massive stock market returns ensuring this. As these conditions are undermined the US's cheap credit lines will be cut off.
Fourth: investment returns will diminish as the capital stock (eg. machines, technological equipment etc.) accumulates.
Marx identified this process as the tendency for the rate of profit to fall.
This tendency cannot be applied simplistically; however it does identify an inherent contradiction between technological development and the profit motive of capitalist production.
A falling rate of profit as a result of accumulated investment will shatter the dreams of a new 'paradigm' or golden age of capitalism, and will contribute instead to stagnation and crisis.
In The Socialist 16 March 2001: